H&M looks to brand diversification, logistics, for growth
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H&M looks to brand diversification, logistics, for growth

H&M saw its shares fall to their lowest levels in four years this March, as it reported inventory levels that had risen by 30% year-on-year. Partly, this is the result of strong competition from rivals like Inditex and Primark. And partly it’s the result of rising costs in Asia, where a strong US dollar (suppliers’ currency of choice) has pushed net profit down to 9.5% of sales, against 26% in 2007. But the company isn’t taking it lying down.

There are other reasons H&M has struggled to grow beyond its already sizeable presence: for one thing, branding. Maureen Hinton, GlobalData Plc analyst in London, says:

“When you’ve got a very mature brand, you reach a point where it becomes challenging to keep up growth. You’ve got to find new markets and new customers.” This is H&M’s biggest challenge: having established itself and captured the market, it has to pursue growth through other markets. And the best way to do this is through new brands.

That’s why H&M look to be taking a leaf out of Inditex’s book. The latter company, which is also the world’s No. 1 fashion retailer, has run an ambitious multi-brand operation since 1991, effectively capturing a variety of tastes and price points in the process. H&M is more recent to the multi-brand party, having only started to diversify its offering since 2007.

Another way in which H&M could follow Inditex’s lead is by putting the fast back in fast fashion. Both companies are known for it, but Inditex has been doing it better. There’s a simple reason for that: Inditex produces its clothing close to its stores – that means European factories, for European shops. H&M prefers to outsource its production to Asia.

However, given today’s logistics capabilities, this is hardly an excuse – and the company knows it. Describing its failures in this area, H&M’s CEO Karl-Johan Persson said:

“We haven’t been as precise, exact, and flexible as we could have been. We see big improvement potential.”

The good news is that the company is addressing this concern head on. It’s promised to reduce lead times, automate warehouses, and improve data collection. This means it will get clothes to store quicker, and be able to address product shortages and overruns much more quickly. Taken in tandem with its search for new markets, will this finally make enough of a difference to put Inditex on the ropes?

Disclosure

Dominion holds both H&M and Inditex in its Global Trends Luxury Fund.


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